Talking Numbers On Hill

August 10, 1994

Federal Reserve Board Chairman Alan Greenspan was sharply critical Wednesday of the way government takes statistics to measure the economy.

In comments before a House Government Operations subcommittee, the Fed chief said that by the time price indexes demonstate that inflation is on the upswing, "many imbalances that are costly to rectify have developed already."

Greenspan said the list of shortcomings in U.S. economic data has become depressingly long.

In looking at those shortcomings, Greenspan said there were biases in price indexes, incomplete reporting of international transactions, uneven coverage of financial accounts of households and firms, unreported economic activity and other problems.

Greenspan said "the historical record shows that higher price inflation tends to surface only as the business cycle matures."

He said that "signals from financial and commodity markets may warn about the development or easing of bottlenecks sooner than highly aggregative readings on unemployment, national income, prices or the traditional monetary aggregates."

Greenspan said that most indexes, including the consumer price index, tend to overstate inflation. He said it would be useful if the government could review the CPI measure.

Greenspan also told the subcommittee that the derivatives markets potentially provide central banks with new opportunities to aid in forecasting economic activity.

He also said the Treasury could issue obligations that have interest and principal payments related to consumer prices. However, he went no further in discussing this issue in his prepared testimony.

Following Greenspan's remarks, Treasury bonds declined in price as traders said his comments about the defects in government statistics provided scant assurance that inflation can be kept under control.

"I think what it boils down to is that the inflation indices are generally lagging indicators of economic activity, but they carry a great deal of momentum," said Steven Wood, director of financial markets research at BA Securities in San Francisco. He said that once inflation sets in, it's a lot harder to eliminate it than to have prevented it in the first place.

The yield on the 30-year Treasury bond rose to 7.59 percent, from 7.58 percent on Tuesday.

Statistics on July inflation are due out on Thursday and Friday as well as data on retail sales for the month.